Understanding the difference between public limited company and private limited company
What is the difference between a public limited company and a private limited company? Simply put, the former trades shares publicly, while the latter offers restricted share ownership and less disclosure. In this article, we explore how these fundamental differences affect governance, finance, and growth.
Overview:
Defining the landscape: Public vs private limited companies
There are two main types of companies: private and public limited companies. The former, private limited companies, have their shares securely held by a selective group of individuals often consisting of founders, management, or private investors. These companies do not offer shares to the public and are characterised by their fewer disclosure requirements.
On the opposite end of the spectrum are public limited companies, which are open to public investment and are subject to more stringent regulations. These public company types offer their shares to the general public, expanding the pool of potential shareholders and, in turn, the avenues for raising capital.
Share trading and accessibility
Share trading practices differ significantly between public and private limited companies. Public limited companies offer their shares on a stock exchange, such as the London Stock Exchange, which enhances liquidity and provides access to a larger pool of potential investors. This free trade of shares among the public invites investment from anyone who wishes to participate in the company’s growth.
Conversely, private limited company shares are not traded on a stock exchange, making them less accessible to the general public. Thus, the ability to trade shares and the accessibility of these shares to potential investors is a significant point of difference between these two types of companies.
Transparency and disclosure requirements
Transparency and disclosure requirements present distinct obligations for public and private limited companies. Public limited companies are under the watchful eye of regulatory bodies, such as the Financial Conduct Authority (FCA), and are required to comply with stringent reporting standards.
This demands comprehensive financial disclosures and operational transparency, providing shareholders and the public with extensive information about the company’s:
- financial performance
- executive compensation
- risk factors
- major business developments
On the other hand, private limited companies face fewer regulatory obligations and are afforded more privacy concerning their financial and operational information. This difference in transparency and disclosure requirements directly impacts the perceived transparency of these companies, with public companies generally perceived as more transparent.
Capital raising opportunities
The methods of raising capital differ between public and private limited companies. Public limited companies, due to their ability to offer shares to the public and institutional investors, have access to larger pools of potential funding, allowing them to raise substantial capital. In contrast, private limited companies maintain more control over their ownership with fewer shareholders, often consisting of close associates like friends and family.
In addition to issuing shares, public limited companies also have the option to raise capital through other avenues such as loans and reinvesting their retained profits. These differences in capital-raising strategies, including ways to raise money, are crucial to understanding as they greatly impact a company’s growth prospects and financial stability.
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The anatomy of ownership and control
The structure of ownership and control in a company plays a pivotal role in its operations, decision-making process, and overall success.
In a public limited company, the shareholders, who have purchased stock, are the actual owners, and they are not held personally liable for the company’s debts beyond their investment in share value. The company needs at least two directors to manage its affairs.
The company secretary, another mandatory role in a public limited company, must possess adequate knowledge and expertise to perform their duties effectively.
Directorship dynamics
Directorship dynamics vary between public and private limited companies. Here are some key differences:
- A public limited company in the UK requires a minimum of two directors for incorporation.
- A private limited company can be incorporated with only one director.
In private limited companies, one individual can simultaneously hold the role of director and shareholder, adding another layer of uniqueness to their structure. - Directors of public limited companies, however, are held to specific qualifications as part of their professional threshold for the role.
The role of the company secretary
Another notable difference between public and private limited companies is the role of the company secretary.
Public limited companies are legally required to have a company secretary, and failure to appoint one is considered an offence. The secretary must be suitably qualified, such as a chartered secretary, chartered accountant, or solicitor.
In contrast, private limited companies can choose whether or not to appoint a company secretary, granting them greater flexibility compared to public companies.
Shareholder relations and voting rights
The relationship between a company and its shareholders is crucial to its performance and success. Shareholders in public limited companies have a claim to the company’s assets and profits and can influence company management through their voting rights.
At the annual general meeting, these shareholders can vote on company matters, impacting management decisions. Contrastingly, shareholders in private limited companies often have more direct access to management, giving them greater influence over decisions, due to fewer shareholders and more informal structures.
Financial thresholds and obligations
Running a company involves differing financial commitments and responsibilities for public and private limited companies.
For instance, to become a public limited company, a private company must have assets equal to or exceeding its called-up share capital plus undistributable reserves, as shown by the annual accounts in the form of an audited balance sheet within the past seven months.
Share capital minimums
Different share capital requirements significantly impact the financial obligations of public and private limited companies.
Public limited companies (PLCs) in the UK are legally required to have a minimum nominal share capital of £50,000 upon incorporation, with a minimum of 25% paid-up nominal value for each share,. On the other hand, private limited companies have no statutory minimum share capital requirement, allowing them to have a practical minimum of one share.
Furthermore, before a PLC can commence business operations, it must obtain a trading certificate from Companies House, which confirms that the minimum share capital requirement has been met.
Profit distribution and dividends
The distribution of profits in public and private limited companies is another critical point of divergence. Profits from a public limited company are typically distributed to shareholders as dividends, usually once or twice a year, while retaining a portion as working capital.
In contrast, private limited companies distribute profits to shareholders concerning their shareholdings after Corporation Tax, with an option to reinvest surplus income in the business or take it as dividends. However, public limited companies are restricted from reducing share capital under £50,000 by paying dividends.
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Regulatory hurdles and compliance
Running a public or private limited company involves navigating a complex maze of regulatory hurdles and compliance requirements. Public limited companies must adhere to the City Code on Takeovers and Mergers, a collection of rules governing the acquisition process of companies.
These companies are subject to strict regulations and increased scrutiny from various stakeholders, which often guide the management’s decisions and company practices. The increased scrutiny from regulators, investors, and the media can significantly impact a company’s reputation, either positively or negatively.
Moreover, the regulatory oversight required for public companies can enhance investor confidence due to guaranteed transparency and commitment to strict financial reporting standards.
Obtaining a trading certificate
For public limited companies, obtaining a trading certificate is a significant regulatory hurdle. This certificate confirms that at least a quarter of the nominal value of allotted shares has been paid up before the company can start trading or exercise borrowing powers.
The application for a trading certificate includes the following information:
- The company’s proposed name
- Registered office
- The nominal value of the company’s shares
- The proposed amount of share capital to register.
- Trading certificates are typically issued within two weeks of application receipt, and once a public limited company is formed, a trading certificate is sent from Companies House.
Navigating the takeover terrain
The City Code on Takeovers and Mergers applies to all companies that have their registered offices in the UK, the Channel Islands, or the Isle of Man and have any of their securities admitted to trading on a regulated market or multilateral trading facility in these regions.
The Panel on Takeovers and Mergers, an independent body, enforces the City Code.
A firm intention to make an offer commits the bidder to proceed with the offer and post-offer documentation within 28 days. The City Code mandates equity among shareholders, and the board of a target company is required to act in the best interests of the company as a whole.
Public limited companies are barred from engaging in arrangements like exclusivity agreements or break fees with potential bidders during takeovers.
The implications for growth and expansion
Choosing to operate as a public or private limited company greatly influences a company’s growth and expansion potential.
For instance, going public can increase a company’s public awareness, potentially leading to a larger customer base and an increase in market share. However, public companies face the challenge of focusing on short-term results due to market pressures, which may harm long-term growth.
Scaling the business
Unique opportunities and challenges arise when scaling a business as a public or private limited company. Conducting an Initial Public Offering (IPO) boosts a company’s brand awareness by significantly increasing its exposure to the general public, serving as a marketing tool to attract new customers and business partners.
The perception of high growth potential created by going public tends to positively influence investor confidence and attract interest in the company. On the other hand, private companies may be perceived as agile and responsive to market changes, which can positively affect their brand perception among consumers valuing innovation and adaptability.
Asset ownership and protection
In the operation of public and private limited companies, asset ownership and protection are key considerations.
In a public limited company, the liability of shareholders is limited to the amount they paid for their shares, protecting their assets from company debts and insolvency.
Public companies also have the advantage of using their stock as currency for acquisitions or attracting top talent through stock options, which can enhance their market presence. In contrast, private companies enjoy more flexibility in asset ownership and protection due to fewer disclosure requirements and less public scrutiny.
Moreover, public companies must adhere to regulatory standards that ensure transparency in asset ownership, providing a level of protection for minority shareholders.
Investor confidence and credibility
A company’s status as public or private can sway investor confidence and credibility. Public limited companies, subject to more stringent rules and disclosure of financial reports, increase their transparency and credibility among investors.
The regulatory oversight they face can inspire greater confidence in investors due to the perceived reduced risk of financial misconduct. Conversely, investors often view private limited companies as having higher risks due to less regulatory scrutiny, despite the potential for higher returns.
The wider recognition and brand visibility of public companies can lead to better market perceptions, enhancing investor interest and trust. Valuation discrepancies between public and private companies can notably affect investor decisions; publicly traded businesses typically show higher valuations due to liquidity premiums.
Pathways to transformation: Converting private to public
The transformation from a private limited company to a public limited company is a complex process, filled with numerous formalities and shareholder agreements. The conversion process requires at least two shareholders, two directors, and the adoption of new articles of association suitable for a public limited company.
A special resolution passed by shareholders is necessary to approve the change in company structure, from private to public. However, the transition may introduce complexities if shares have been issued for non-cash consideration or new shares have been issued between the balance sheet date and the resolution, which must be managed carefully.
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Summary
In conclusion, understanding the key differences between public and private limited companies is crucial for business owners, investors, and other stakeholders. These differences are evident in various aspects, including share trading, transparency, capital raising opportunities, ownership structure, financial obligations, regulatory hurdles and growth potential.
Whether a company decides to operate as a public or private entity can significantly impact its growth, success, and stakeholder relationships. Therefore, making an informed decision requires a comprehensive understanding of these differences and their implications.
FAQs
Public companies in the UK require a secretary and at least two directors, while private limited companies only need at least one director and one shareholder, who can be the same person. The key legal difference is that public companies can offer shares to the public, whereas private limited companies cannot.
Yes, a self-employed person can also be considered an employee, especially when working for an employer during the day and running their own business outside of those hours. It’s important to be aware of the legal implications and entitlement to rights and protections in such cases.
To convert from a private to a public company, a company needs to complete formalities with Companies House and have agreements among shareholders. This process includes having a minimum of two shareholders, and two directors, and adopting new articles of association.
The advantages of a public limited company include the ability to raise significant capital by selling shares to the public and institutional investors, as well as higher visibility and brand recognition, which can attract new customers and business partners. These factors contribute to the company’s overall growth and success.
Firstly, PLCs are subject to extensive regulatory requirements and reporting obligations, which can be time-consuming and costly to meet.
Secondly, operating as a PLC entails significant costs, including listing fees, ongoing compliance expenses, and higher audit and legal fees. Thirdly, PLCs face intense scrutiny from shareholders, analysts, and the public, which can create pressure to deliver short-term results and meet investor expectations.
Additionally, PLCs may struggle to maintain control over decision-making and strategic direction, particularly in the face of shareholder activism or hostile takeover attempts. Moreover, PLCs are exposed to market volatility and fluctuations in share prices, which can impact investor confidence and make it more challenging to pursue long-term growth strategies.
Firstly, they provide limited liability protection to their shareholders, meaning that the personal assets of shareholders are generally shielded from business liabilities. Secondly, private limited companies have fewer regulatory requirements and reporting obligations compared to public companies, resulting in lower compliance costs and administrative burdens.
Thirdly, private limited companies offer flexibility in ownership and management, allowing shareholders to retain control over the company’s operations and strategic direction without the scrutiny and pressures associated with public ownership.
Additionally, private limited companies can maintain confidentiality, as they are not required to disclose as much information to the public as public companies. Moreover, private limited companies can be more tax-efficient, as they may be eligible for various tax reliefs and exemptions not available to public companies.
Firstly, they may face challenges in raising capital compared to public companies, as their ability to access funding is limited to sources such as loans, retained earnings, or investment from a smaller pool of shareholders.
Secondly, private limited companies have restrictions on the transferability of shares, making it more difficult for shareholders to sell or transfer their ownership interests. Thirdly, private limited companies may lack the visibility and credibility associated with public companies, which can impact their ability to attract customers, suppliers, and investors.
Additionally, private limited companies are subject to fewer regulatory requirements than public companies, but they still have obligations such as filing annual accounts and maintaining statutory registers, which can entail administrative burdens and compliance costs.
